Month: January 2018

Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation.  The simplified synopsis:

You can reduce your business profit by 20% if your overall annual income (not counting capital gains)  is less than $315K (married-filing-jointly) or $157.5K (single).

If you make more than $315K/$157.5K, then the discussion starts to become complicated – the law was written to try to keep high-earners from converting from a W-2 employee to a self-employed business; so you may not be entitled to the deduction if you make over these amounts.

It appears that the average middle class W-2 wage earner is going to be tempted to convince his employer to treat him as an independent contractor in order to:

• Receive the 20% deduction
• Be able to deduct 100% of his un-reimbursed business expenses (which are non-deductible under the new tax law)
• Create and fund a retirement plan (401k/SIMPLE/SEP) that works for him
• Reduce FICA tax by converting to an S Corporation and paying himself a wage less than his profit

Imagine a married salesman who makes $120K/year.  The salesman has $20K of un-reimbursed work-related expenses.

Under the current law, the salesman pays tax on $120K at the following rates:

• Social Security and Medicare tax:  7.65% times $120K = $9,180
• Federal Income Tax:  15% times $120K = $18,000

Total Federal Taxes are $27,180.

If the salesman forms an S Corporation and convinces his employer to give him a 1099 instead of a W-2, then:

• He can deduct the $20K of un-reimbursed expenses
• He then gets a deduction of 20% of his profit (profit is: $120K minus $20K of now-deductible expenses) – this yields another $20K deduction
• His Social Security and Medicare tax would remain unchanged (long story – just trust me) = $9,180
• His Federal Income Tax would now be 15% times $80K = $12,000

Total Federal Taxes are $21,180…a savings of $6,000.

There are, of course, potential downsides/risks to this decision (foregoing the retirement plan matches from employer, foregoing subsidized health insurance from employer, increased audit risk) that have to be weighed.

As with most tax-related issues, the devil is in the details – contact us to make sure you know all of the angles.

In general, the new tax Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act, entertainment expenses incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees”. (i.e. office holiday parties are still deductible). Business meals provided for the convenience of the employer are now only 50% deductible whereas before the Act they were fully deductible. Barring further action by Congress those meals will be nondeductible after 2025.

…so:

Office Holiday Parties are 100% deductible

Meals with clients or others (business related): 50% deductible

Event/Sport/Entertainment tickets:  No deduction

Employee Travel Meals: 50% deductible

Meals Provided for Convenience of Employer (provide meals to keep your employees working/on site):  50% deductible

thus…

A business can no longer deduct as a business expense:  golf, skiing, football tickets, basketball tickets, baseball tickets, disneyland tickets